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Settlement rejections catch on, big decision looms

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It was huge news back in November 2011 when U.S. District Judge Jed Rakoff threw down the figurative gauntlet and said, essentially, that enough is enough when it comes to civil settlements with federal prosecutors. He rejected a hard-won $285 million settlement between the SEC and Citigroup over mortgage-related fraud, questioning the practice of allowing companies to settle without admitting or denying guilt.

The Economist suggests that this conundrum ranks as one of the more vexing challenges for incoming SEC chairman Mary Jo White.

At the heart of his decision was simple common sense: How can you ask a bank to pay $285 million to settle allegations that it broke the law and then allow it to maintain that it hasn't done anything wrong? And once Rakoff had broken the floodgates, other U.S. district judges followed suit.

This month, Judge Victor Marrero rejected the landmark $616 settlement agreed to by the SEC and SAC Capital Management over insider-trading charges. Later, he provided conditional approval, based on the outcome of the appellate court decision in the Citigroup case. Also this month, Judge Sidney Stein rejected another Citi settlement, a $590 million deal to resolve shareholder charges again related to mortgage losses.

The arguments have been hashed out ad nauseam over the last year, and there is merit to both sides of the debate. The incongruence of no-admission-of-guilt settlements is obvious, and galling, especially to critics of big bank practices, some of whom seem to be lusting for justice. Then again, one can understand the argument that forcing banks to admit guilt would result in the sort of litigation that could quite effectively impose a death penalty on a company. It's fair to say that the SEC simply does not have the resources to try complex cases, so its no-admission-of-guilt practices allow it to settle many more cases.

An important milestone in this debate looms: an appellate decision on one of the Citigroup rulings is due soon, possibly this month.

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